Camelia Company is a large commercial real estate contractor that reports its income by using the percentage of completion method.In 2019, the company entered into a contract to construct a building for $900,000.Camelia estimated that the cost of constructing the building would be $600,000.In 2019, the company incurred $150,000 in costs under the contract.In 2020, the company incurred an additional $500,000 in costs to complete the contract.

Question

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Under the percentage of completion method, income is recognized in proportion to the incurred costs. In this case, the total estimated cost to complete the contract is $600,000. In 2019, the company incurred $150,000 in costs, which is 25% of the total estimated cost. Therefore, the company should recognize 25% of the contract revenue in 2019, which is $225,000. However, the company has only received $900,000 in total revenue. Therefore, the company should recognize $75,000 ($225,000 - $150,000) of income in 2019.

Camelia Company Is a Large Commercial Real Estate Contractor That